Dupont's Q3 Cost Reduction Wave: The Lucky and The Earned

Dupont recently released its Q3 earnings report, putting on a strong earnings showing. A story in this morning's Wall Street Journal notes that the firm's "profit rose a better-than-expected 11%" and "Like other chemical companies, DuPont has scrambled to cut costs as demand during the recession has fallen dramatically while major customers in the construction, automotive and textile industries have seen sales decline". But the real story behind this positive earnings surprise is in the cost cutting detail.

According to the earnings announcement, "Companywide fixed cost reduction and productivity actions boosted third quarter pre-tax earnings by about $300 million" bringing "year-to-date program cost reductions to $900 million versus the company's full-year goal of $1 billion". This is obviously the "earned" cost reduction that Dupont is riding successfully into shore, wave after wave. But there's also a lucky and opportune component to this effort, owing to reduced overall commodity prices. To this end, Dupont notes in their earnings announcement that "Raw material, energy and freight costs adjusted for currency and volume were 12 percent lower versus 2008".

In other words, Dupont is not only in serous internal Spend Management mode -- they're also riding the commodity wave down. But the big question on many people's minds in Q4 is, will Dupont's cost cutting efforts continue to offset a challenging sales environment (and will Dupont take risk off the table through commodity hedging)? As commodity prices climb -- just as oil has recently -- they'll need to double down on the cost cutting variables that they can control versus those they're just getting lucky on.

Fortunately, cost cutting has been in Dupont's DNA for quite some time, dating back to John Campi's success as CPO and the company's early investment in e-sourcing, among other areas. Our own benchmarking at Spend Matters suggests that Dupont leads many of its chemical and process manufacturing competitors in procurement, supply chain and IT sophistication and is slightly ahead of the average compared with its pharmaceutical peers.

Jason Busch

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